CFO Series: Managing Operational Risk

Operational Risk Management: Why Automation is Key

By Joseph Denk

In this blog we will explore the topic of Operational Risk and Operational Risk management. The definitions that will be used are as defined by the Basel II Committee.

Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee.

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These recommendations contain internationally accepted risk management definitions and principles, which will be used herein as the basis for risk definitions.

The Basel II Committee defines operational risk as “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” The Basel II Committee continues to define seven event categories pertaining to operational risk. Today, I will focus on the 7th, which is “Execution, Delivery, and Process Management – data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets.” Click here for more.

As a CFO, you have many concerns. Of these concerns, one of the largest is most likely risk management. With ever-changing regulatory, political, and other external environmental factors you have to find a way to navigate these murky waters and find a way to be profitable. As with the captain of any ship, your navigation abilities are limited to the quality of the maps which you are using. If your maps have data entry errors, accounting errors, and your FP&A department struggles to deliver the reports which you rely on to make these navigation decisions, then it is evident that mitigating this operational risk is imperative.

How do we mitigate these risks? The fast answer: through automated financial reporting and controls. Technology has come a long way and if your FP&A is still using Excel or a platform which requires them to re-create reports each time it is needed, then they are falling behind on delivering the quality analysis and insight that you as a captain need to steer the ship. Not only is the significant time spent developing these reports valuable time lost that could be spent on more analysis and value adding activities, but the potential for error is high.

At this point we’re still just talking about standard reporting and analysis. How valuable would automated scenario analysis be to your navigation abilities? Can you see the potential? An FP&A team that spends minimal time on report writing, data validation, and other mundane task gets to spend the majority of their time sophisticating the inputs for strategic scenario analysis. They get to spend time gaining a deeper understanding of the business and locating potential revenue opportunities, identifying process failures, and assisting you in your goals.

We’ve been able to help multiple organizations minimize their event 7 operational risk, create scenarios which identify profit opportunities, and be fully prepared for the future regardless of the outcome, so that you can always ensure a win.

Want to learn more about how to mitigate operational risks? Contact me at jdenk@innovergent.com!

2018-08-13T09:53:49+00:00

About the Author:

Director of Technical Services at InnoVergent

Is your business leaning on Excel spreadsheets for budget and forecasting?